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Understanding Effective Taxes: Criteria, Principles, Types, and Incidence

This article provides an overview of the criteria and principles for effective taxes, including equity, simplicity, and efficiency. It also explains the different types of taxes such as progressive, regressive, and proportional taxes, as well as the distinction between direct and indirect taxes.

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Understanding Effective Taxes: Criteria, Principles, Types, and Incidence

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  1. Ch. 14 • Know the criteria for effective taxes • Know the principles of taxation • Understand and identify different types of taxes

  2. Criteria for Effective Taxes • Equity- Make as fair as possible • Simplicity- Everyone can understand • Efficiency- Easy to administer and generates revenue

  3. Principles of Taxation • Benefit principle of taxation- those who benefit more from spending of tax dollars should pay more for the taxes

  4. Ability to Pay • Those that can best afford to pay taxes pay more taxes

  5. Progressive Taxes • Tax that takes a larger percentage of higher incomes and smaller percentage of lower incomes • EX: Federal Income Tax

  6. Regressive Taxes • Tax that takes a larger percentage of lower incomes and smaller percentage of higher incomes • EX: Sales Tax

  7. Proportional Taxes • Tax that takes the same percentage of income from all taxpayers • Ex: Income Tax Percentage if set at 20%.

  8. Tax Incidence • Group on whom the tax burden actually falls

  9. Direct Taxes • Tax levied and paid by an individual taxpayer • EX: Personal income tax

  10. Indirect Taxes • Tax that can be shifted from one person to another • EX: Property tax for landlords, businesses • Ease of shifting tax depends on how bad consumers want product (Inelastic Demand)

  11. DO YOU KNOW? • 3 Criteria for effective taxes? • 2 principles of taxation? • Difference between progressive, regressive and proportional (flat) • Difference between direct and indirect taxes?

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